Question

Variable and Absorption Costing Chandler Company sells its product for $104 per unit. Variable manufacturing costs per unit are 545, and fixed manufacturing costs at the normal operating level of 12,000 units are $240,000. Variable selling expenses are $15 per unit sold. Fixed administrative expenses total $104,000. Chandler had no beginning inventory in 2016. During 2016, the company produced 12,000 units and sold 9,000. Would net income for Chandler Company in 2016 be higher if calculated using variable costing or using absorption costing? Calculate reported income using each method. Do not use negative signs with any answers. 900,000 x Absorption Costing Income Statement Sales Cost of Goods Sold: Beginning inventory O Variable Costs Fixed Costs Less: Ending Inventory Cost of Goods Sold Gross profit Selling expense Administrative expense Net Income X X X X OX Variable Costing Income Statement Sales Cost of Goods Sold: Beginning inventory Variable Costs Less: Ending inventory Variable cost of goods sold Variable selling expense Contribution margin Fixed costs: Manufacturing cost . 0 Administrative Expense Total Fixed Cost Net Income OX Ox

Answer 1

Note : Fixed manufacturing cost per unit under absorption costing = $240,000 / 12,000 units = $20 per unit.

Absorption Costing Income Statement

Sales (9,000 units * $104)		$936,000
Cost of goods sold
Beginning inventory	0
Variable costs (12,000 units * $45)	540,000
Fixed costs (12,000 units * $20)	240,000
Less :: Ending inventory [($45 + $20) * 3,000 units)	195,000
Cost of goods sold		585,000
Gross profit		351,000
Selling expense (9,000 units * $15)		135,000
Administrative expense		104,000
Net income		$112,000

Variable Costing Income Statement

Sales (9,000 units * $104)		$936,000
Cost of goods sold
Beginning inventory	0
Variable cost (12,000 units * $45)	540,000
Less : Ending inventory (3,000 units * $45)	135,000
Variable cost of goods sold		405,000
Variable selling expense (9,000 * $15)		135,000
Contribution margin		396,000
Fixed costs :
Manufacturing costs	240,000
Administrative expense	104,000
Total Fixed costs		344,000
Net income		$52,000